Singapore-listed Dow ETF offers local investors a gateway to US stocks, say panellists

PANELLISTS

• Jermyn Wong, head of intermediary, South-east Asia, State Street Global Advisors

• Geoff Howie, market strategist, Singapore Exchange

• Sue Lee, director and Asia-Pacific head of index investment strategy, S&P Dow Jones Indices 

Moderated by: Ben Paul, senior correspondent, The Business Times

Why has the US market performed so strongly in the last 10 years and how should we be thinking about gaining exposure to the market right now? 

Jermyn Wong: I think the US market has been performing very strongly for more than just 10 years – it’s been performing very strongly for the past 50 years. Especially in the last 10 years, there has been a lot of criticism about the US market and questions on whether it would continue to perform, with some saying “it’s a big bubble”, “it’s very high”, “price-to-earnings ratios are off the charts”.  

But time and again, they have been proven wrong… One of the reasons I think the US market continues to be strong, especially relative to a lot of other developed markets, is that it’s now in a space where household as well as corporate balance sheets are just extremely strong. 

The average household net worth is approximately 800 per cent of the individual’s annual disposable income… meaning your net worth is eight times your annual disposable income. And that’s the average household in the US.

Companies are extremely cash rich too, partially due to the many years of quantitative easing and low interest rates in the past 10 years. And the US has got some really strong, consistently profitable companies. That’s some of the reasons I think the US has performed so well. I think (the US market has to be) a very important and core part of any investor’s asset allocation, even going forward. 

Where does the Dow fit into that spectrum of possibilities in gaining access to US stocks? 

Wong: I think exchange-traded funds (ETFs) are a great way to gain exposure to the US market, and the S&P 500 has been extremely popular… Nobody really talks about the Dow anymore. Part of the reason is the performance, but also bear in mind that… the S&P 500 is actually very heavy in the Magnificent Seven. So the Dow can potentially be a good diversifier… especially in an environment like today’s where you’re not quite sure whether or not the tech companies will continue to perform. 

How are the 30 components in the Dow selected? How often do they change and on what basis? 

Sue Lee: The S&P 500 is based on several quantitative measures such as market capitalisation, liquidity, and also earnings – (the company) must have four consecutive quarters of positive earnings. It (must also have) a public float, where at least 10 per cent of the public shares need to be available for trading, and also proper sector representation. The index committee actually chooses based on these quantitative areas and their own discretion to pick the 500 stocks to represent the US equity market. That ’s how they select it. 

But (for) the Dow, (the committee) will choose among these 500 (S&P) stocks, and then they will choose (on an as-needed) basis. So (the Dow) doesn’t change very often, and it’s up to the committee’s discretion. But what’s important is that they have qualitative criteria. 

The companies need to have excellent reputations and need to have shown sustained growth, and need to be important to a large number of investors. So you can see the difference between the criteria. The Dow has US large-cap companies, just like the S&P 500, but it has higher standards and qualitative measures. You can think of it as a selected blue-chip stock index. 

Geoff Howie: I just want to point out that the Dow Jones and ETFs seem to be playing to a lot of strengths that we’ve got in the overall market. At the moment, there’s obviously been – when you look at ETFs across the world – much more demand for actively managed ETFs. And it sounds like the index methodology of the Dow Jones is certainly more active than the S&P 500 index methodology. So that’s playing to a strength which is relevant to the demand at the moment. 

It’s not just about the low fees of the ETFs – it’s also about a little bit more… beta. And that plays to a strength with Singapore investors, because they have a propensity to be value traders. 

What is your view of the market right now for US stocks and Asian stocks? 

Howie: During the Trump 1.0 administration, tariffs became specific and gesture-like to China… But it’s not just about China in Trump 2.0. (Robert Lighthizer) was Donald Trump’s trade representative in Trump 1.0 and (in his book The Worst Trade Ever: Changing Course, Taking on China, and Helping America’s Workers) Lighthizer’s not just talking about China. He’s talking about other countries that have large trade surpluses on the back of their exports to the US. India’s mentioned in there. Vietnam’s mentioned in there. South Korea is mentioned in there. And during the last four years, those trade surpluses that these Asian countries have with the US have also gotten a lot stronger, so there’s going to be a lot to wait and see. 

The Trump administration is not really (keen on) having a strong US dollar as well. There is a silver lining in that, but it does have implications for everything that is overarching to our market, particularly the Federal Reserve (Fed). And now, when you look at expectations for where rates are going… we are looking at slightly higher interest rates than we thought. 

That also supports the US dollar, and it’s going to make our lives in South-east Asia a little bit tougher because the US is looking to pursue very strategic industrial policies to secure its economic supply chains, really take on some sustainability infrastructure, and also invest in Big Tech and onshore many upstream tech businesses.

So that marketplace for international capital, whether it’s portfolio inflows or foreign direct investment, is going to become a lot more competitive, albeit still in the same structural sectors that we’re working in. So like I said, (there will be) big, seismic changes. We have to wait and see week by week how these things (play) out. 

There are a few moving parts out there, but what sort of index strategies could you adopt at this point?

Lee: I think we are in an interesting macro environment right now. If you think about it, we are now finally seeing the inflationary pressure from Covid. Finally, the Fed has started cutting rates. So we’re going into the late cycle, but with Trump in the driving seat. And then the import tariff potentially coming in will also put upward pressure on inflation. It’s hard to predict whether inflation will continue to go down, and how fast the Fed will be able to cut rates. In this sort of environment… I will say it may be hard to see the US equity market having returns as high as this year. 

But having said that, what I would say is, when you look at your portfolio, always having a core position is very important. And trying to time the market… that’s a very difficult job… As an individual investor, I think what you can do is always have your core portfolio and then be very diversified. I think that’s the position you can always have. 

Can you talk a little bit about the dividend aspect of the Dow versus the S&P 500 versus the Straits Times Index (STI)?

Lee: Compared to the STI (which has a dividend yield of 4.5 per cent), the US equity market will not give you as high a dividend yield. The S&P 500 is about 1.4 per cent, and the Dow is slightly higher. Given the characteristics that we mentioned, it is about 1.7 per cent. 

But if you think about the long term, it’s also about having that right mixture of the dividend and capital growth. If you compare the total return of the past 20 years with the STI and S&P 500 or Dow, your total return, including dividend, will not be very different. The (Dow’s) dividend yield of 1.7 per cent from 20 years ago will be a much higher portion now because of the capital growth it has given. 

So you always have to think about these two perspectives – capital growth and dividend income. Dividend income you will get today, but capital growth will give you more potential for future dividends. So having this right balance is important.

When I buy a US stock here in Singapore, I get hit with a withholding tax every time there’s a dividend. How does it work with the ETF?

Wong: It’s the same. So if you buy anything that is listed in the US, be it an ETF or a stock, whenever it pays dividends, an investor in Singapore will get hit by a 30 per cent withholding tax. That’s just the tax law that we all cannot run away from.

What is the advantage to investing in the Dow through a Singapore-listed ETF?

Wong: I think perhaps the biggest benefit to investing in a local listing versus the US listing is the ability to invest using non-cash avenues such as the Supplementary Retirement Scheme (SRS). For example, we’re coming to the end of the year – I’ve always been a big advocate of contributions to the SRS, so if you have not (contributed to your account), please remember to do so before Dec 31 if you want to save some tax for your tax returns next year. The Dow Jones listed in Singapore is one avenue for you to be able to deploy your SRS money, as compared to the US listing, because if you buy anything in the US, you cannot use SRS money. 

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